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Short-Sighted Tax Cuts Hurting Energy States

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The severe financial problems confronting states that rely heavily on revenues from oil, natural gas, and other energy sources would be much less serious if those states hadn’t cut taxes in recent years. If states like Louisiana, Oklahoma, and West Virginia had pursued a more fiscally responsible course, the recent plunge in energy prices wouldn’t have so badly harmed their ability to support schools, roads, health care, and other building blocks of a strong economy.

Louisiana faces a current-year shortfall of close to $1 billion, or about 11 percent of the general fund budget. The projected shortfall for next year doubles to $2 billion, nearly one-quarter of the budget. These shortfalls are rooted in poor fiscal policy well before oil prices tanked. In 2007 and 2008, lawmakers repealed income tax increases they had enacted earlier in the decade to offset a sales tax cut that’s still in effect, setting the state back about $800 million a year. Plus, the cost of a handful of business tax incentives has ballooned to about $1 billion a year.

Many areas of the budget are protected from cuts, so Louisiana’s public universities may well face big cuts — even though lawmakers have already reduced per-student spending by 42 percent since 2008, more than any other state except Arizona.

Oklahoma faces a massive $1.3 billion shortfall next year, about 20 percent of the budget. The recent decline in oil revenues is partly to blame, but years of short-sighted income tax cuts paved the way for the current crisis. For example, tax cuts since the mid-2000s for the oil and gas industry will cost the state $350 million this year. Over that same time, lawmakers have cut the top income tax rate from 6.65 percent to 5 percent at a cost of over $1 billion each year.

Governor Mary Fallin wants to maintain the latest top rate cut, which took effect last month, but Senate leaders are pushing to reverse it, noting that without more revenues the state may have to cut K-12 education by $400 million. Since the recession, Oklahoma already has cut “general” K-12 funding (the main source of state support for schools) more than any other state: 24 percent.

West Virginia’s shortfall for next year stands at about $466 million, nearly 10 percent of the budget. Not only are severance tax revenues from natural resource extraction coming in almost 50 percent (or $245 million) lower than expected, but the state has been cutting other taxes since the late 2000s. For example, it phased out the business franchise tax, eliminated the grocery tax on food, cut corporate income taxes, and enacted new tax breaks for businesses — at a combined cost of $415 million a year. Here, too, universities could take a hit, putting more pressure on them to raise tuition, which has risen 32 percent since 2008.